Lloyds Banking Group Reports 20% Drop in Annual Profits Amid Rising Costs and Motor Finance Scandal

Lloyds Banking Group has reported a 20% decline in annual pre-tax profits for 2024, falling short of market expectations due to rising costs and a significant charge linked to the ongoing motor finance commission scandal.

The FTSE 100 lender posted profits of £5.97 billion, down from £7.5 billion in 2023 and below analysts’ forecasts of £6.4 billion. The bank’s income was affected by a lower net interest margin—the difference between interest earned on loans and the cost of funding—amid falling interest rates.

A key factor in the profit drop was an additional £700 million provision related to potential compensation for customers impacted by undisclosed or partially disclosed commissions on car loans. This charge brings Lloyds’ total provision for the issue to £1.15 billion. The case stems from a Court of Appeal ruling involving consumers Wrench, Johnson, and Hopcraft, who challenged lenders’ responsibility when credit brokers, such as car dealerships, fail to fully disclose commission details.

Chief Executive Charlie Nunn stated that the extra provision was a response to the appeal court’s decision, which went beyond the scope of the Financial Conduct Authority’s (FCA) initial review into motor finance commissions. Nunn acknowledged that “significant uncertainty” remains regarding the final financial impact of the scandal.

Despite these challenges, Lloyds reported growth in key areas. Loans and advances to customers increased by £10.2 billion over the year, reaching £459.9 billion, driven by a £6.1 billion rise in UK mortgages. Customer deposits also grew by £11.3 billion to £482.7 billion, reflecting solid consumer confidence in the UK’s largest high street bank.

The bank also noted an improving economic outlook, supported by recent growth in house prices and a more favourable assessment of risks such as inflation and interest rate volatility.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, commented that the additional provision had “clouded” what was otherwise a strong fourth quarter. However, Britzman highlighted that Lloyds had successfully improved its loan quality throughout the year, defying concerns that borrowers might struggle under the pressure of persistent inflation.

Despite the profit shortfall, Lloyds’ share price has risen by more than 40% over the past year, reflecting broader optimism within the banking sector and the company’s consistent performance outside the motor finance charge.